Blockchain. To most investors, this word is immediately connected to cryptocurrencies and the underlying technology that underpins them. However, while headlines continue to focus on crypto volatility, it is important to remember that blockchain has not fallen by the wayside in the world of DeFi (decentralised finance) and investing. In fact, blockchain technology has continued to grow in importance, either through the ever-growing number of use cases or simply for the advantages it brings.
Since blockchain was first introduced to the mainstream world more than a decade ago, the technology has seen interest coming from many quarters, with the most prominent of it arguably being the finance industry. As the digital revolution takes off across the world, blockchain is set to fundamentally change the way financial transactions take place, with profound implications for investors.
Improving cross-border remittances
Even though the world has become smaller through globalisation, it still remains time-intensive and expensive to send funds across borders. Making cross-border payments can cost an average of 7% in fees alone and take significantly more time to complete than domestic payments. Blockchain can bridge this gap as it is specifically designed as geographically non-discriminatory financial technology, knowing no bounds and therefore, meaning that transactions across borders can take place more smoothly.
In the world of trading, this also means that settlement processes do away with intermediaries involved in the process, lowering trading costs, and allowing trades and settlements between counterparties to potentially happen instantaneously.
By eliminating third parties in transactions, blockchain also has the ability to integrate with systems and processes, allowing more security and transparency within the network. Every user can see the full record of all transactions, which are made public and verifiable to some degree. Verification is also completed not by one centralised entity, but by an entire network of validators.
Creating global digital currencies
The decline in the use of cash and the corresponding rise in electronic payment systems in major economies has driven governments across the world to explore the development of central bank digital currencies (CBDCs), which leverage the decentralised and secure advantages of blockchain technology. A survey recently released by the Bank for International Settlements showed that 90% of 81 central banks that were surveyed from October to December 2021 were “engaged in some form of CBDC work”, with 26% of central banks currently developing a CBDC or running a pilot.
CBDCs have implications on financial systems as a whole, with one being the reduction of friction in national payments systems, as well as facilitating and lowering the cost of cross-border transfers. In Southeast Asia, the Philippines announced in March this year that it will be piloting the implementation of their CBDC, with the aim of not only enhancing payment system efficiencies, but also promoting financial inclusion through wide-scale government cash assistance programmes.
The tokenisation of asset classes
Blockchain also has the potential to transform the way investors invest in physical assets. Tokenisation, by means of blockchain technology, fragments the ownership of an asset into digital tokens, and makes these tokens accessible to investor groups. Examples of assets that can be tokenised include tangible ones like real estate, art or ships, as well as intangible goods like licences.
For now, we are seeing strong potential in real estate investing, as it addresses many challenges within the asset class. Benefits of tokenised real estate include:
- Improved liquidity, as a tokenised property cuts out intermediaries in the transaction process and allows parties to transfer ownership directly.
- Fractional ownership, as tokenisation allows a broader group of investors to invest directly through smaller amounts of capital.
- Increased transparency and security, as the benefits of blockchain technology provides investors with a full record of transactions, which cannot be manipulated or cancelled.
Is blockchain really the way to go?
The benefits of blockchain and its subsequent use cases continue to be explored within the financial and investing industry, and while its benefits are widely known, that is not to say that blockchain comes without its drawbacks.
For one, scalability remains a weakness of blockchain. As of now, there has yet to be a blockchain that has scaled enough to handle mass amounts of transactions. The fixed size of a block for strong information is limited, which means that only a couple of transactions can be held on a single block. Scalability is being addressed in many ways, from second-layer solutions, to upgrades and improvements of current blockchains, and we would expect more developments in the space.
With that being said, and taking the aforementioned advantages into consideration, it is clear that blockchain technology offers the potential for an overhaul or at the very least, a fundamental change, of financial markets. The financial industry would need to navigate this revolution by understanding the different ways blockchain technology could potentially impact different stakeholders, including investors, and adapt to ensure that proper safeguards are in place for the investing community.